China will keep investing in euro

This week the deputy head of China’s state foreign exchange control Yi Gang said that China will retain a policy to diversify its assets and continue to be a long-term investor in assets denominated in euros.

“We have to conserve and enhance the value of portfolio investments in the euro area and Europe. In other words, the return on investment is higher than the local inflation. In the future, we will always invest in Europe and European markets”, said Mr. Yi.

In general, the market reacted positively to the statements of Chinese foreign exchange control.

Another positive news from China was the message from the head of the People’s Bank of China Zhou Xiaochuan, who said that the Chinese authorities laid considerable room for maneuver in the strategy of monetary policy in 2012.

China’s central Bank may “substantially” reduce the reserve requirements on bank deposits, said the head of the regulator.

Currently, the reserve ratio exceeds 20%. According to Zhou Xiaochuan, the decision depends on the amount of liquidity, which will be available to financial markets.

In turn, reduction in reserve requirements allow private financial institutions to release funds to build credit in light of the volatility of foreign capital flows.

Statements by the Chinese Central Bank dictated by weak statistics: in the Feb. China showed the largest trade deficit in more than a decade – it amounted to 31.5 billion. In the reporting month, consumer prices, retail sales and industrial production fell short of market expectations.

Against the background of China’s economy slowing down, analysts are talking about the need to stimulate domestic demand through the provision of fiscal and monetary benefits. And it is always perceived positively by the market and increases the desire for risky assets. The result is an increase in the value of the euro.